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Is Social Security Really at Risk From the Debt Ceiling?

The government shutdown has gone on for more than a week, quashing initial hopes that any disruption from Washington's closure would be short and insignificant. Now, attention is turning to the potential breach of the debt ceiling, which has much more dire implications for the well-being and livelihood of the 57 million Americans who rely on Social Security. As the debate intensifies, Social Security recipients have reason to fear that they could see an interruption in much-needed benefits if the debt ceiling isn't raised.

Washington gridlock and the chaos that has ensued The shutdown has furloughed hundreds of thousands of government workers, and the collateral economic damage from the closure has affected millions of other Americans. Government contractors in particular have had to take steps that have hurt their workers in light of the shutdown. Last week, United Technologies (NYSE: UTX) said it could have to furlough as many as 5,000 of its own workers if the shutdown continues. Similarly, Boeing (NYSE: BA) announced its own set of slowdowns and expected furloughs in light of its defense-contract exposure. Thus far, though, the shutdown hasn't had a major impact on Social Security recipients, as they've still been able to apply for benefits and receive their monthly benefits as essential government services.

But the debt ceiling raises bigger concerns for Social Security. Earlier this week, President Obama said, "In a government shutdown, Social Security checks still go out on time. In an economic shutdown, if we don't raise the debt ceiling, they don't go out on time." The Social Security Administration has reportedly started notifying recipients that a failure to raise the debt ceiling would put Social Security benefits at risk.

Is a debt-ceiling disaster unavoidable?As dire as those calls sound, though, it's not entirely clear whether hitting the debt ceiling would automatically mean that Social Security payments would have to stop. Some experts point to the fact that Social Security funding is mandatory, giving it priority over the discretionary spending over which Congress has more direct control in its budgeting process. That fact has kept payments flowing even during the shutdown, and some argue that it would justify even what some would see as an illegal debt-ceiling breach to keep them going.

Another argument in favor of continued benefits is that Social Security has its own dedicated funding source. Payroll taxes and self-employment payments come in on a regular basis, and employers and self-employed workers make those payments specifically as Social Security taxes. Diverting those taxes to other purposes, such as paying interest on Treasury securities, isn't technically allowed, as Social Security Trust Fund assets must be used for Social Security. Moreover, any end-run around those requirements would have negative political ramifications that lawmakers would likely prefer to avoid. Indeed, a default on Treasuries might be politically easier to stomach than punishing millions of retirees who constitute a key voting bloc for lawmakers seeking reelection.

Yet the political stakes have risen so high that keeping hot-button issues like Social Security on the table has value in providing leverage for lawmakers' arguments. The chart below shows the extent to which those aged 65 and older have come to rely on Social Security as a major source of income. As a result, the threat of a Social Security disruption has been an essential part of the debt ceiling debate, regardless of whether it would actually come to pass.

As this chart shows, Social Security has become an even larger part of total income in the past 50 years for those aged 65 and older. Source: Social Security Administration.

Keeping on scheduleThe Treasury has said that it expects the government to hit the debt ceiling around Oct. 17. If the SSA stopped making benefits payments, that date would potentially create a divide among Social Security recipients.

Currently, Social Security recipients get paid on different days of the month based on their dates of birth. For those born between the first and 10th days of the month, benefits are paid on the second Wednesday of the month, which is today. Those born between the 11th and 20th days of their birth month will get paid next Wednesday, while those born from the 21st to the 31st are scheduled to receive their benefits on Oct. 23. Thus, that third group of recipients could end up without an October payment in a debt-ceiling breach. A longer crisis could affect others in their November payments.

In the end, who suffers most from hitting the debt ceiling will depend on how the government prioritizes its limited financial resources. Big government contractors aren't likely to get hurt substantially in any event, as they have the reserves to make it through any payment delays unscathed. United Technologies had $4.9 billion in cash on its balance sheet as of June 30, while Boeing had more than $14 billion in cash and short-term investments. By contrast, many Social Security recipients live check-to-check. Yet despite the dire consequences for its recipients, until the government actually figures out those priorities, it's impossible to guarantee that Social Security will be immune to the debt-ceiling debate.

Defy the debt ceiling and make the most of your Social SecurityThe reason the debt ceiling is such a key problem is that Social Security plays an essential role for millions of Americans. Even once the debt ceiling debate gets resolved, though, it's critical that you make the most of the program. We can help. In our brand-new free report, "Make Social Security Work Harder For You," our retirement experts give their insight on making the key decisions that will help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Tune in to Fool.com for Dan's regular columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.

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“The Social Security Administration has reportedly started notifying recipients that a failure to raise the debt ceiling would put Social Security benefits at risk.”

This is a clear example of the Democrats scaring the elderly and disabled for political purposes.

This whole debt ceiling story is a joke. The media has failed, for the most part, to cover it accurately.

There is plenty of income coming in each month via total Federal Government tax receipts, to pay social security benefits. If they do not get paid, it is because the current administration has determined that paying other obligations is more important.

Given that the government has been claiming for 30 years that there is a Social Security trust fund where all the Social Security "contributions" we've been making our entire working lives are safely stored away, I think the president would have difficulty explaining how it is that, if the government can't borrow money for even one day, those Social Security checks won't go out. Where's that trust fund? Why not write the checks from there?

It doesn't matter how much revenue Treasury brings in on a monthly basis. What matters is daily cash flow. Treasury doesn't receive tax revenue in even amounts on set days like workers receive paychecks. Daily tax revenue can vary from $2-3 billion to more than $100 billion.

If there's $0 in the bank, a $20 billion SS payment due, and $10 billion of tax revenue coming in that day, checks are delayed. And as many budget analysts have pointed out, that's exactly the kind of situation we'd face. See the link below. On November 15 the Treasury has $42 billion in bills due, and will take in $14 billion in tax revenue. With $0 in bank unless the debt ceiling is raised, most bills won't be paid.

And people could say "Well the Treasury should save up tax revenue on good days to pay the bills on days when revenue falls short." Yes, and that's what it's been doing since May. The debt ceiling was hit in May. Treasury has been shuffling around bills and not redeeming debt in government pension funds to extend its cash. It won't be able to do that any more starting next week.

Also, the notion that Treasury takes in enough revenue even on a monthly basis to cover SS, Medicare and debt interest isn't correct. The figure likely came from taking annual revenue and dividing it by 12, but again, that's not how actual cash flow works.

Look at the table in the link below, showing monthly Treasury revenue and outlays. Treasury took in $122 billion in revenue in February. That month it owed $72 billion in SS payments, $17 billion in interest payments, and $70 billion in Medicare/Medicaid payments, or a total of $159 billion in just those three vital categories.

I don't mean to be so blunt, but it's really dangerous when we're a few days away from defaulting on the national debt for the first time in 235 years and the people setting the tone of the conversation are unshakably certain about things they know little about.

@deckdawg - The Trust Fund is invested in special Treasury obligations. Under ordinary circumstances, it pays benefits by redeeming those securities, with the government issuing other bonds to investors to raise that cash. Unfortunately, that leaves the Trust Fund in the same situation as other Treasury-bond owners, although some have speculated about some extraordinary measures that could potentially be available.

@skypilot - Thanks for the comments. The situation isn't nearly that simple, and with both parties having supported policies that have created massive deficit spending that got us into this mess in the first place, it's clear that partisan politics are only obscuring the true nonpartisan issue of whether this nation can ever be fiscally responsible again. Episodes like this strongly suggest that the answer is no.

They might as well just repeal the debt limit law if passing an increase involves giving one side 100% of what it wants and the other side 0%. Give the 5 year old what he wants and save us the soap opera drama.

As I understand it, Social Security monies are, by law, invested in Treasury notes. On a monthly basis, the SSA cashes in notes sufficient to cover that month's benefits. I believe that all benefit recipients will receive their October payments, since those notes were redeemed on October 1 (I certainly hope so, since I am one of those getting paid on the 23rd of October).

By the way - SSA anticipates receiving $65 billion more in taxes for 2013 than it needs to cover benefits, and that such overages are the rule, rather than the exception. Social Security is safe for the foreseeable future.

Sending report...

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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